Forget Chipotle, Buy These 4 Restaurant Stocks Instead As people gradually return to dining out given that almost half of the U.S. population is fully vaccinated against COVID-19, the restaurant industry i...

As people gradually return to dining out given that almost half of the U.S. population is fully vaccinated against COVID-19, the restaurant industry is witnessing a solid recovery after a devastating year. While Mexican fast food giant Chipotle Mexican Grill (CMG) doesn't look sufficiently fit to capitalize on the industry's recovery, we think the shares of restaurant operators McDonalds (MCD), Starbucks (SBUX), Texas Roadhouse (TXRH), and The Wendy's (WEN) are, in contrast, well positioned to deliver solid returns in the coming months. Let's discuss.

Most restaurants have redesigned their business models to offset some of the losses caused by the COVID-19 pandemic restrictions. And primarily restaurants in the fast-food industry have been able to stay in business and generate profits by implementing heightened hygienic measures, online delivery, and drive-throughs.

But, although fast-food chain Chipotle Mexican Grill, Inc. (CMG) has managed to gain significant ground over the past year, the stock has been losing its momentum lately on concerns over the company's growth prospects. While CMG's revenue increased 23.5% to $1.74 billion in the first quarter of 2021, its operating expenses surged 18% to $1.58 billion. In addition, the company closed five of its restaurants in the first quarter. And CMG's recent menu price hike by roughly 4%, to cover the cost of raising its workers' wages has piqued investors' concerns.

In contrast, McDonald's Corporation(MCD), Starbucks Corporation (SBUX), Texas Roadhouse, Inc. (TXRH), and The Wendy's Corporation (WEN) are better positioned to take advantage of the rising demand for indoor dining given that nearly 50% of the U.S. population is fully vaccinated against COVID-19. Since these companies have plenty of room for growth, we believe their stocks could be solid bets now in contrast to CMG's.

McDonald's Corporation (MCD)

MCD is a prominent global foodservice retailer that operates and franchises more than 39,000 McDonald's restaurants worldwide. U.S. international lead markets, high growth markets, foundational markets, and corporate are among the company's target market segments.

In May, MCD announced that it will form new multi-year agreements with media firms. This longer-term strategy will help improve its marketing supply chain, and encourage inclusive, real narrative between its brand and a wide range of consumers.

MCD's revenue increased 8.7% year-over-year to $5.12 billion in the first quarter, ended March 31, 2021. Its operating income grew 34.7% from its year-ago value to $2.28 billion, while its net income improved 38.9% year-over-year to $1.54 billion over this period. The company's EPS increased 39.5% from its year-ago value to $2.05.

An $8.63 consensus EPS estimate for the current year represents a 42.6% improvement year-over-year. Analysts expect MCD's revenue to increase 16.8% year-over-year to $22.4 billion in its fiscal year 2021. The stock has gained 27.9% over the past year and 9.8% year-to-date.

MCD's POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

MCD has an A grade for Quality, and a B for Growth, Stability, and Sentiment. Within the A-rated Restaurants industry, it is ranked #5 of 45 stocks.

To see additional POWR Ratings for Value and Momentum for MCD, click here.

Starbucks Corporation (SBUX)

SBUX is a specialty coffee retailer with locations in more than 82 countries. It operates through three segments: Americas, International, and Channel Development. It provides goods and services under a variety of brands in addition to its iconic Starbucks Coffee brand, including Teavana, Seattle's Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi.

Last month, SBUX announced that it will launch its first store in Barbados this year, in collaboration with Caribbean Coffee Traders Limited. The store will offer its unique Starbucks Experience to local consumers for the first time. This move should help the company make a positive impact among various new communities and bolster its growth.

In its fiscal second quarter, ended March 28, 2021, SBUX's net revenues increased 11.2% year-over-year to $6.67 billion. Its operating income grew 102.6% year-over-year to $987.6 million. The company's net income increased 100.8% from its year-ago value to $659.4 million over this period, while its EPS surged 100% year-over-year to $0.56.

The company's EPS is expected to grow 155.6% year-over-year to $2.99 in the current year. Furthermore, SBUX has an impressive earnings surprise history. It beat consensus EPS estimates in each of the trailing four quarters. Analysts expect SBUX's revenue to increase 22.4% year-over-year to $28.79 billion in its fiscal year 2021. Also, the stock has surged 59.7% over the year and 30.5% over the past nine months.

It is no surprise that SBUX has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Growth, and a B for Sentiment and Quality. In the Restaurants industry it is ranked #6 of 45 stocks.

In total, we rate SBUX on eight different levels. Beyond what we've stated above, we have also given SBUX grades for Stability, Momentum, and Value. Get all the SBUX ratings here.

Texas Roadhouse, Inc. (TXRH)

TXRH operates in the casual dining segment in the United States and internationally. It has 537 domestic restaurants and 97 franchise restaurants, including Bubba's 33 restaurants and Texas Roadhouse.

During the first quarter, ended March 31, 2021, TXRH's total revenue increased 22.7% year-over-year to $800.63 million, while its comparable restaurant sales at company restaurants increased 18.5% year-over-year. Its income from operations grew 412.5% from its year-ago value to $80.93 million. The company's net income increased 300.2% from its year-ago value to $64.15 million over this period. TXRH's EPS increased 299% year-over-year to $0.91.

TXRH is expected to generate 37.6% revenue growth for the current year. Its EPS is estimated to increase 660% year-over-year to $3.42 in 2021. Over the past year, TXRH's stock has gained 98.8%. And it has gained 23.5% so far this year.

TXRH's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. TXRH has an A grade for Growth, and a B for Momentum and Quality. Among the 45 stocks in the Restaurants industry, it is ranked #15.

Click here to see the additional POWR Ratings for TXRH (Sentiment, Value, and Stability).

The Wendy's Company (WEN)

WEN operates through three business segments—Wendy's US, Wendy's International and Wendy's Global Real Estate and Development—and is engaged in developing and franchising its quick service restaurants. The company operated approximately 361 Company-operated restaurants; nearly 5,520 franchised restaurants in the United States; and 947 franchised restaurants globally, as of January 3, 2021.

Last month, three strategic development agreements were announced by WEN, with the owners of Kusto Group and Global Investors Limited, to enhance its brand presence throughout Central Asia over the next nine years. With this move, WEN should be able to expand its brand footprint across The Republic of Georgia, Uzbekistan and Kazakhstan and drive business growth.

WEN' total revenue increased 13.6% year-over-year to $460.2 million in the first quarter of 2021. Its operating profit increased 70.6% year-over-year to $83.1 million. Its net income rose 186.4% from its year-ago value to $41.4 million. The company's adjusted EBITDA increased 35.4% year-over-year to $121 million, while its EPS grew 200% from the prior-year quarter to $0.18.

The company's EPS is expected to grow 29.8% year-over-year to $0.74 in the current year. The Street expects WEN's revenue to increase 6.7% in its fiscal year 2021 and 2.5% in 2022. WEN's stock has gained 6.4% over the past year and 5% year-to-date.

WEN's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. WEN also has a B grade for Quality and Momentum. The stock is ranked #22 of 45 stocks in the Restaurants industry.

In addition to the POWR Ratings grades we have just highlighted, one can see WEN's ratings for Growth, Value, Sentiment, and Stability here.

MCD shares were trading at $235.06 per share on Monday morning, down $0.62 (-0.26%). Year-to-date, MCD has gained 10.83%, versus a 17.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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